Debt crisis in Greece

The origin of the debt crisis lies in the growing public debt which has risen to a high as 113% of its GDP. The reasons for this are:

Declining share of wages in GDP. This is because the real wages of the workers have grown at a much lower rate than the growth at a much lower rate than the growth in productivity. This has led to a decline in the share of consumption out of DGP, which in turn has adversely affected investments and thereby growth in GDP and thus setting a chain reaction.

Losing out on competitiveness to Germany, the dominant partners in the European Monetary Union (EMU). The labour costs have increased by as much as 30% in Greece over a period of 10 years (2001 to 2010) as compared to just 5% in Germany. Thus Germany has a relative advantage vis-a-vis Greece.

Inability to increase interest rates to seek international funds to help the crisis control. Since its interest payments are going at a very high rate, the option of increasing interest rate is limited.

Greece is a part of unified currency under a common central bank under EMU. If it had an independent currency, it would have had an independent central bank, which could have bought Governments bonds to finance the deficit expenditure.

What is the solution?

The reform in the EMU or Greece to abandon the EMU. The European Central Bank should buy the bonds floated by different member nations.

Need for strict capital controls to curtail the flow of hot money in and out of the economy so that they cannot hold the economy to ransom.

Increase the direct tax rates while maintaining expenditure on job-creating activities. This would increase the growth rate and at the same time decrease the debt burden from the increased tax revenues.

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